Study Finds Gaps in Professional Wealth Management

The assets owned by high net worth individuals (HNWI) reached $50 trillion in 2007, according to a study of the global private banking and wealth management market by management consultancy Oliver Wyman.

The firm said in a press release it predicts growth of HNWI assets will slow to 9% per year from the rate of 11% for the last five years, however, HNWI assets are expected to reach $75 trillion in 2012. Finding that the percentage of wealth that is professionally managed or advised is low – about 50% – the study, “The Future of Private Banking: A Wealth of Opportunity?,’ notes the business opportunity for wealth management firms and private banks worldwide is large.

The market to manage wealth is expected to become more competitive as new players enter the industry and the study reveals that keeping assets onshore is an emerging trend and building local operations to serve wealth locally is a priority for wealth management executives.

The analysis indicates that private banks generate the most value for shareholders from each client, suggesting that broker-dealers could come under pressure from other types of firms. Relatively high levels of client defections and high compensation paid to relationship managers are among the factors that challenge the profitability of broker-dealers, the press release said.

The study finds a shift is already underway in the U.S. and that the industry is emphasizing a holistic approach to wealth management and is stressing independent advice and transparency. This is indicated by the convergence that has occurred between broker-dealers and banks and the fact that assets managed by registered investment advisers in the U.S. doubled to $2.1 trillion between 2001 and 2006.

“While traditional securities firms will maintain a dominant position in the U.S. wealth management landscape, we believe that a modified version of the advisory model will continue to take market share,’ said John Colas, Head of the North American Retail and Business Banking Practice of Oliver Wyman, in the release.

Oliver Wyman suggests wealth management firms of all models need to focus on five opportunities to institutionalize their client relationships and create value:

Segmentation – Entrepreneurs constitute a significant and growing share of today’s wealth market, and managers used to servicing “old money’ will have to adjust their offering to tap this market. Today, 70% of wealth is self-created, not inherited, and roughly half of new wealth management business comes from entrepreneurs.

Product Strategy – Clients are increasingly demanding a comprehensive offering, covering both the asset and liability sides of their “balance sheets.’ In this context, lending presents an important opportunity that can increase client value by up to 31% through additional revenues and improved retention. Advanced lending solutions, however, will require more sophisticated risk management systems.

Relationship Management – Institutionalizing the client relationship – tying clients to the bank rather than to Relationship Managers (RMs) – has a significant impact on profitability.

Brand – Those that manage HNWI assets operate in the luxury business as much as in the banking business. As a result, brand is instrumental in attracting and retaining the right clients and wealth managers must ensure consistency between the promise given by their brand and the services delivered at all client touch points.

Risk Management – For non-financial risks, emphasis should lie on specific operational and reputational risks. For financial risks, earnings volatility modeling should lay the foundation for improved understanding of levers available to control risk-return.